Dynamic Economic Decision Making.

By John E. Silvia. 2011. Wiley Finance. Hoboken, Neu. Jersy. Pp. 381. $70 hardcover.

Business Economies (2012) 47, 156-158.

doi:10.1057/be.2012.8

This is an interesting book about making sound choices in the decision process when dealing with an economy that is complex, dynamic, and often riddled with uncertainties. Silvia argues, correctly, that you should have tools and an unbiased approach free of fallacies to formulate game plans that address financial and economic issues in an effective way. There are consequences, both positive and negative, to the choices we make. It is hard to argue with either the premise or the urgency that motivated the book. Economists and financial analysts are often faced with establishing policy or advising on courses of actions with significant consequences, and they need a systematic approach unclouded by preconceived biases when dealing with these issues in a dynamic and often myopic world. Better and more transparent decision making is a noble cause, and any guidance on the strategic process is most welcome, both for the experienced practitioner and for those students learning for the first time And the teacher in this case is one with a wealth of experience as a thoughtful observer of the U.S. macroeconomy.

The book provides a guide for both public and private decision makers on how to construct and use a coherent framework that binds together global macroeconomic performance and the fate of individual projects. With the recent run-up in economic and financial volatility, developing this framework is of paramount importance for many businesses and public enterprises. Silvia emphasizes that effective decision making is a process that must make the most of the information available, while remaining vigilant to numerous cognitive and psychological biases that routinely cloud the judgment of far too many decision makers.

The first few chapters of the book: (1) present an overview of basic indicators that someone new to tracking the performance of the economy needs to get a handle on; (2) introduce the reader to basic techniques of distinguishing cyclical and structural changes in the economy; and (3) highlight modern challenges for sustained growth and global competitiveness. Following a discourse on these introductory topics, the author transitions to a discussion of risk-management applications. Several chapters lay out how macroeconomic shocks, changes in expectations of economic fundamentals, perceived uncertainty, and various decision-making biases interact with historical and existing practice for dealing with risk. Much of the discussion includes examples from several recent periods of financial distress. The final part of the book links macroeconomic risks (both fiscal and monetary) to actions of policy makers, the behavior of international capital markets, and the general pace of technological progress and innovation.

Investors and private decision makers would benefit most from this work. It is likely that macroeconomic volatility is here to stay, at least for a while. The recent financial crisis did not resolve many imbalances in the world economy, and it is prudent for any decision maker to be prepared for adjustment, which might come sooner than expected and be more abrupt than commonly believed. In general, anyone involved in research, data analysis, decision making, and policy design should be aware of numerous biases identified in the book. Psychological and cognitive biases in decision making and information processing are emphasized again and again. A short list of biases is worth hanging on the wall (or maybe placed on the computer background picture) for every decision maker.

The book contains a lot of information and the author's take on events immediately preceding and during the recent financial crisis. The reaction of policy makers in the aftermath of the crisis is also covered, thus the timeliness. The parallels drawn to past financial crises and episodes of credit crunches are interesting, particularly for many economists, investors, and decision makers.

The typical target reader would learn quite a bit about some relevant parts of economic history. A short overview of the monetary and regulatory history of the U.S. financial markets is useful in piecing together the similarities among the episodes of financial distress since World War II. Each chapter contains a list of real-world questions that real decision makers either have had to deal with already or will face shortly. A recommended reading list at the end of each chapter nicely complements the book itself, supplying the interested reader with a path to a deeper understanding of the issues at hand.

That the author is to be commended for addressing such a challenging topic does not leave us without a few quibbles, of course. The book can be repetitive at times, with certain points reiterated frequently. Then again, this can be helpful if the ideas in the book are new or you are reading only a selection of chapters. Also, repetition may be valuable, especially since there are (intentionally) very few formulas in the book (our biases are showing). Often a general statement is made that begs for an example to back up the point, and none follows. In other cases, numerous examples follow statements that could use at most one.

We have our own biases: little attention is given in the book to liquidity trap arguments, the threat of deflation, parallels to Japan, and the existence of liquidity-constrained households. But perhaps the book is long enough as it is (381 pages). Unfortunately, there are also more than the normal number of typographical errors in the book; the most unfortunate is the misspelling of the name of Nobel laureate Tversky.

But quibbles are just that: quibbles. The assembling and analysis of macroeconomic views/risks/scenarios for general business and public-sector decision making and investment is a worthy undertaking. Daily reminders of psychological decision making and information processing biases are helpful, as is a guide of indicators for someone beginning to pay attention to the world economy. We recommend the book both to those who would benefit from its educational content, and to those practitioners who seek a broader view of their actions and the potential consequences of those actions.

George A. Fulton and Daniil Manaenkov Research Seminar in Quantitative Economics, Department of Economics, University of Michigan, Michigan, U.S.A.